How Does Credit Affect the Economy?

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CaptainDan

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Have you ever thought about what a credit economy is? I'm currently reading "The Rise of Credit Culture" section in Michael Maloney's book titled, Guide to Investing in Gold & Silver. It's an interesting section that got me thinking about how beneficial, yet dangerous, credit can be.

Back in the days before the Federal Reserve was created, credit was very limited. It was primarily given to commercial enterprises, such as corporations and farms. It mattered who credit was offered to because the loan was very real. You need to remember that back then, currency was linked to actual gold holdings. If a borrower didn't pay their loan back, another organization suffered.

After the Fed was born, credit flowed much more freely. Part of this was because of how currency was created. During these times, the U.S. dollar was less linked to gold than it had ever been, so the offering of credit to those who needed or wanted to borrow was less risky to any given enterprise. The problem was, with the onset of credit came the onset of borrowing. And borrow they did. People were taking out loans for cars, houses, businesses, and stocks. Yes, they'd even borrow money from banks to buy stocks. As you can imagine, because of all this lending and borrowing, bubbles emerged. And with every bubble comes a burst. So back then, not only did loans for stocks cause credit bubbles, they also caused stock market bubbles. You know, for people who seem to be so smart, bankers aren't at all at times. Unless, of course, they know exactly what they're doing. But that's another post for another time.

If you think about it, the entire idea of credit is sort of like a pyramid scheme. In order for the system to be maintained, more and more borrowers need to come forth to build upon the currency that's already been loaned out. And if the borrowers get spooked and don't want to borrow, guess who does? That's right, governments do. In our case, that would be the U.S. federal government. In today's world, think about the COVID crisis. Consumer lending crashed during this time, but government borrowing didn't at all. As a matter of fact, U.S. government borrowing has reached a peak not seen since World War Two. All this borrowing makes me think sometimes. How will we as a nation pay all this money back? Who loaned it to us? What if it's not paid back? What happens then? These are all valid questions and they really should be top of mind for every American. I've said time and time again, the one and only issue that American's should be concerned with is national debt. If there was no debt, any other social program could be easily paid for. Also, one day, this debt chicken will come home to roost. It's then when most Americans will care less about the social issues they enthrall themselves in today.

According to Mike, the credit economy is all about people's perceptions. If the economy is steaming ahead, people will borrow and spend. But if the economy begins to falter, people will run off and hide. The last thing they'll want to do is borrow and spend when there's a lousy economy around them. And on top of that, as the economy weakens, banks aren't particularly fond of lending either, even though that's their business. The whole thing makes me feel like the credit economy is built upon a very weakly constructed house of cards. The more we as a nation borrow, whether it be consumer, commercial, or national, the weaker we as a nation become. And if you've ever taken notice, it's during our financial crises that most structural change occurs in the governmental and financial arenas. I'm telling you, one day, a big collapse is going to occur and the "only way we're going to solve it" is if we fundamentally change our nation. Of course, it'll be for the worse. We need to stop borrowing all over the place. No more personal, business, or governmental.

How do you feel about credit? Which is worse, national debt or personal debt? Do you think another collapse is on the horizon? If so, how do you think that'll affect us? Let me know down below.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
 
How Does Credit Affect the Economy? was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.
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